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January 30, 2009 Full Impact of Department of Defense Program to Restart State-owned Enterprises Difficult to Estimate

What SIGIR Found Task Force efforts have served to help restart state-owned factories and provide employment in a difficult security environment. However, the full measure of their impact is difficult to estimate because of the absence of good baseline data and weaknesses in the methodology used to identify the number of jobs impacted by the effort. Task Force officials cited two primary reasons why reliable baseline data could not be obtained. First, security considerations limited the time available to tour factories and identify potential projects that could improve operations. Second, assessment teams had to rely on testimonial evidence on the status of production and number of employees working. Absent reliable data, the task force developed an alternate methodology to estimate a 24,500 jobs impact. Impact was defined as returning people to work that were already on an SOE’s payroll but not working because a factory was inoperable and/or had limited work for all employees. However, SIGIR was unable to validate the methodology used and does not believe it provides a reliable basis for estimating job impact. In some cases the estimate is based on the total number of employees in a company rather than the number of employees at an individual factory receiving assistance. Going forward, Task Force officials have established performance metrics involving impact on employment, production, and sales, and plans to establish a baseline for these metrics to better assess the impact of the FY 2008 projects.

Additionally, the Task Force has not impacted employment as quickly as initially expected because projects have taken longer to implement than planned. The Task Force anticipated that most of the FY 2007 projects would be implemented within six months. However, only one project was completed within six months and implementation of most projects is now estimated to take more than 13 months from inception.

SIGIR’s work identified three areas where internal controls can be improved. First, SIGIR found that although the Task Force verifies that items purchased directly by SOE’s are received, it does not obtain copies of invoices to verify the cost of these items. Because about $18 million (61 percent) of the funds disbursed as of November 30, 2008 have been transferred electronically or by cash payment directly to SOE’s to purchase raw material or equipment, it is important for the Task Force to verify the cost of these items to ensure full accountability of funds. Second, SIGIR found two cases in which the Task Force provided the equivalent of $229,400 in Iraqi dinars to two SOEs, but has not verified how these funds were used. Third, SIGIR found that items purchased on U.S. contracts are often paid for before verifying receipt of the items by the SOEs. Although SIGIR found that verification of receipt has occurred after the fact, such practice creates a vulnerability to fraud. DoD does not plan to request any additional funding for projects to restart SOEs because the Government of Iraq has significantly increased its capital budget to rehabilitate SOEs and has begun to enter into joint ventures with foreign investors to manage some SOEs. Any remaining assistance is likely to be technical in nature, rather than involving purchases of equipment.

Special Inspector General for Iraq Reconstruction

For more information, contact SIGIR Public Affairs at (703) 428-1100 or PublicAffairs@sigir.mil

Summary of Report: SIGIR-09-009

Why SIGIR Did This Study In June 2006, the Department of Defense (DoD) established a Task Force in the Office of the Secretary of Defense to focus on efforts to stimulate economic development and employment in Iraq. One of the Task Force’s major efforts has been to revitalize Iraqi state-owned enterprises (SOE). These enterprises include factories that were important in Iraq’s pre-war economy, employing about 200,000 Iraqi’s, according to DoD officials. The Task Force has received about $103 million to revitalize state-owned factories.

SIGIR undertook an audit to determine the baseline data and performance metrics the Task Force used to assess the impact of its program to restart state-owned enterprises, the adequacy of internal control procedures used to mitigate risk and ensure that the funds are used for intended purposes, and future Task Force plans. SIGIR performed work at Task Force locations in Arlington, Virginia and Baghdad, Iraq. We also visited five state-owned enterprises assisted by the Task Force. Security requirements limited the number of SOE’s that SIGIR could visit, and the time available at each site.

What SIGIR Recommends SIGIR recommends that the Task Force (1) establish milestones to ensure that baseline data required to assess the impact of the Fiscal Year (FY) 2008 projects is obtained in a timely manner, (2) obtain copies of invoices to verify the cost of items purchased directly by SOE’s, and (3) verify receipt of items before payment is made under contracts awarded by the Joint Contracting Command-Iraq.

DoD agreed with the report’s recommendations. However, DoD was concerned that the report neither reflected the difficult operating environment, the conservative nature of the employment estimates, nor the full measure of their controls over disbursements. SIGIR’s report addresses these concerns.

SIGIR Special Inspector General for IRAQ Reconstruction

SPE CI AL INS P EC TOR G EN ERA L F OR IR AQ EC ONS TRU CT ION

January 30, 2009

MEMORANDUM FOR U.S. SECRETARY OF DEFENSE DEPUTY UNDER SCRETARY OF DFENSE FOR BUSINESS TRANSFORMATION U.S. AMBASSADOR TO IRAQ

SUBJECT: Full Impact of Department of Defense Program to Restart State-owned Enterprises

Difficult to Estimate (SIGIR 09-09) We are providing this audit report for your information and use. It pertains to efforts to reopen state-owned enterprises in Iraq, led by the Department of Defense’s (DoD) Task Force to Improve Business and Stability Operations in Iraq. The audit was conducted by the Special Inspector General for Iraq Reconstruction (SIGIR) as project 8035, under the authority of Public Law 108-106, as amended, which also incorporates the duties and responsibilities of inspectors general under the Inspector General Act of 1978. We considered comments from the Deputy Under Secretary of Defense for Business Transformation when preparing the final report. The comments are addressed in the report, where applicable, and a copy is included in the Management Comments section of this report. We appreciate the courtesies extended to the SIGIR staff. For additional information on this report, please contact Glenn Furbish at (703-428-1058/glenn.furbish@sigir.mil).

Stuart W. Bowen, Jr. Inspector General

Table of Contents

Executive Summary i

Introduction 1

Background 1

Lack of Reliable Baseline Data and Performance Metrics Make It Difficult to Fully Estimate Impact 4

Controls over Disbursements Can be Improved 9 Future Assistance to SOEs Expected to be Limited 12

Conclusions and Recommendations 13 Management Comments and Audit Response 14

Appendices

A. Scope and Methodology 15 B. State-owned Enterprises Assisted with FY 2007 Funds 17

C. Acronyms 19 D. Audit Team Members 20

E. Management Comments 21

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Full Impact of Department of Defense’s Program To Restart State-owned Enterprises Is Difficult To

Estimate

SIGIR-09-009 January 30, 2009

Executive Summary

Introduction Since the inception of the war in 2003, Iraq has reportedly had an approximate 60 % underemployment/unemployment rate. The Department of Defense (DoD) believed that this high rate was a factor in fueling insurgency in the country in 2006; in June 2006, DoD established a Task Force to Improve Stability and Business Operations in Iraq to stimulate economic development and employment in Iraq. One of the Task Force’s major efforts has been to revitalize Iraqi state-owned enterprises (SOE), which are factories that played an important role in Iraq’s pre-war economy. SOEs employed about 200,000 Iraqi’s, according to DoD officials. Since its inception in June 2006, the Task Force has received about $50 million in FY 2007 and $53 million in FY 2008 to revitalize state-owned factories. Projects associated with the FY 2007 funding are being implemented, although most of projects associated with the FY 2008 funding have not yet been given final approval for implementation. Once a project is selected for funding, the Task Force enters into a cooperative agreement with the state-owned enterprise to implement the project. These agreements describe the assistance to be provided, the project time frames, and the procedures for the disbursement of funds. SIGIR’s reporting objectives for this report were to assess the following:

the baseline data and performance metrics the Task Force used to estimate the impact of its projects

the adequacy of management controls the Task Force has in place to mitigate risk and ensure funds are used for the intended purposes

the Task Force’s future plans to assist state-owned enterprises In July 2008, SIGIR reported on the financial resources devoted to the Task Force, and the major areas of economic development assistance, along with examples of projects.1

1 Information on a Special Department of Defense Program to Foster Economic Recovery in Iraq, SIGIR-08-024, July 29, 2008.

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Results

The Task Force faced a very difficult security environment, particularly as it launched the initial phases of its efforts. Nonetheless, the Task Force’s efforts have served to help restart state-owned factories and provide employment. Although Task Force efforts have served to help restart state-owned factories and provide employment, the full measure of its impact is difficult to estimate because of the absence of good baseline data and weaknesses in the methodology used to identify the number of jobs impacted by the effort. Task Force officials cited two primary reasons why reliable baseline data could not be established on actual production levels and numbers of employees working at each SOE prior to providing assistance. First, security considerations limited the time available to tour individual factories and identify potential projects that could improve operations. Second, Task Force assessment teams had to rely on testimonial evidence on the status of production and number of employees working. Absent reliable data, the Task Force developed an alternate methodology to estimate job impact. Because the goal of the FY 2007 projects was to return people to work, the Task Force decided to use employment impact as the sole performance metric to assess the impact of the FY 2007 projects. Job impact was defined as returning people to work that were already on a SOE’s payroll but were not working because the factory was inoperable or did not have sufficient work for all employees. The Task Force estimated the FY 2007 projects would impact about 24,500 jobs. However, SIGIR was unable to validate the methodology used because there was no supporting documentation on how it was developed. Also, SIGIR found a number of anomalies in individual impact projections. For example, some estimates were based on the total number of employees in a state-owned enterprise rather than the number of employees at the individual factory being assisted. SIGIR does not believe that this approach provides a reliable basis for predicting job impact. Going forward, the Task Force has developed performance metrics involving impact on employment, production, and sales and plans to establish a baseline for these metrics to better assess the impact of FY 2008 projects. Additionally, the Task Force has not been able to impact employment as quickly as initially expected because projects are taking longer to implement than planned. The Task Force originally expected to implement most of the FY 2007 projects within six months. However, only one project was completed within six months and most of the projects are now estimated to take more than 13 months to implement. Task Force officials stated that projects are taking longer to implement because of delays in obtaining detailed requirements from the SOE’s and the time required to process procurement actions.

SIGIR’s work identified three areas where internal controls can be improved. Two related to funding provided directly to SOEs through electronic transfer or cash payments to make purchases, and the third area involves contracts awarded directly by the U.S. for items to be delivered directly to SOEs. In the first instance SIGIR found that although the Task Force verifies that items purchased directly by SOEs are received, it does not obtain copies of invoices to verify the cost of these items. Because about $18 million (61%) of the funds disbursed as of November 30, 2008 have been transferred directly to SOEs to purchase raw material or equipment, it is important for the Task Force to verify the cost of these items to ensure full accountability of funds. In the second instance, SIGIR found two cases in which the Task Force provided the equivalent of $229,400 in Iraqi dinars to two SOEs, but has not verified how these

iii

funds were used. In the third instance, SIGIR found that items purchased on U.S. contracts were often paid for before verifying receipt of the items by the SOEs. While SIGIR found that verification of receipt has occurred after the fact, but this practice creates a vulnerability to fraud. In commenting on a draft of this report, the Director noted that only one payment was made for general operating expenses and that the other payments were made to procure raw materials and, in the case of the Tikrit Flour factory, for expenses to open the factory. We were unable to verify this new information but included it to fully present the Task Force’s position. We will verify this data when we follow up on our recommendations. The Director of the Task force told SIGIR that there are no plans to request any additional funding for projects to restart SOEs because the Government of Iraq (GOI) has significantly increased its capital budget to rehabilitate SOEs and has begun to enter into joint ventures with foreign investors to manage some SOEs. He noted, however, that the Task Force has contracts with two consulting firms to provide technical assistance and build the capacity of the Iraq Ministry of Industry and Minerals and the management of the SOEs, which will extend until the end of FY 2009. The contracts include helping the ministry negotiate joint ventures with foreign investors and helping SOEs develop business plans. Beyond 2009, further assistance would be contingent upon GOI funding. Recommendations To ensure that reliable data is available to assess the impact of projects being implemented with FY 2008 funds, SIGIR recommends that the Deputy Under Secretary of Defense for Business Transformation require the Task Force to (1) establish milestones for the timely collection of baseline data associated with the recently created performance metrics.

To improve accountability over U.S. funds and reduce vulnerability to fraud, SIGIR recommends that the Deputy Under Secretary of Defense for Business Transformation direct the Task Force to (2) obtain copies of invoices to verify the cost of items purchased directly by SOEs; and (3) follow existing internal control procedures and verify receipt of items at SOEs before payment is made under contracts awarded by the Joint Contracting Command-Iraq.

Management Comments and Audit Response The Deputy Under Secretary of Defense for Business Transformation, Director, Task Force to Improve Business and Stability Operations, Iraq (TFBSO) provided comments on a draft of this report. A copy of this letter is in Appendix E. The Director stated that he appreciated the recommendations made in the report and is working to implement them. However, he also noted that he believes the report falls short in acknowledging the environment that existed at the time the program was started, and their conservative approach to establishing an estimate of jobs impacted for use in internal MNF-I reporting, the strong validation and verification procedures in place, and the impacts to the stabilization of Iraq the program has made. He further noted that TFSBO’s ability to spend time and money doing detailed “baselining” during the worst period of insurgent activity was very limited. However, nonetheless, they are acquiring the services of a professional accounting firm to audit the entire “value chain” impact of their efforts.

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Our final report notes that the task faced a very difficult security environment, particularly as it launched the initial phases of its efforts. Nonetheless, the task force’s efforts have served to help restart state-owned factories and provide employment. However, we continue to believe that the program’s full success is difficult to measure without adequate baseline data. We are encouraged that the task force plans to engage an accounting firm to determine the impact of their efforts. The Task Force Director also noted that Task Force efforts have led to foreign and private investment in SOEs it has reopened, and that it is working with the Government of Iraq to increase the budget of the Ministry of Industry and Minerals. Our draft report discussed both of these issues and this report was updated to reflect information provided by DoD. The Director recognized SIGIR’s concern regarding controls over disbursements over equipment and funds but went on to note various risk mitigation measures they had in place including that Task Force personnel physically verify receipt of equipment and material. Our draft report recognized that the Task Force verifies physical receipt of equipment and material, and we continue to believe that obtaining an invoice is a standard part of an effective management control process. The Director provided additional information on disbursements which we incorporated into this report as appropriate. Finally, DoD noted that a system is in place to ensure that the Task Force and JCC-I/A coordinate before an invoice is paid. Our draft report stated that a system is in place; however, our work shows this process was not always followed.

1

Introduction This report, the second SIGIR report on efforts of the Department of Defense (DoD) Task Force to Improve Business and Stability Operations in Iraq (Task Force), examines DoD’s efforts to restart and revitalize Iraqi state-owned enterprises (SOE).2 For several years SIGIR has focused heavily on audits of Iraq reconstruction projects under its oversight authority, which has been tied to the sizeable Iraq Relief and Reconstruction Fund. Over time, the Congress has provided SIGIR increased oversight authority over other funds that provide support to Iraq relief and reconstruction activities, such as the Economic Support Fund, and similar funding provided by DoD to support economic recovery in Iraq. SIGIR has initiated audits in these areas to assess management of the efforts and outcomes.

Background

In a memorandum dated June 22, 2006, the Deputy Secretary of Defense tasked the Deputy Under Secretary of Defense for Business Transformation to lead an effort in accelerating reconstruction operations in Iraq. In the memorandum, the Deputy Secretary established the Task Force to Improve Business and Stability Operations in Iraq and stated that “Economic development and job creation in Iraq are critical success factors to build a stable country.” The memorandum stipulated that in leading Task Force, the Deputy Under Secretary was to draw on the resources of the Business Transformation Agency.3 The Task Force has offices in Arlington, Virginia and in Baghdad, Iraq. The Task Force has 6 U.S. government personnel and 28 contractor personnel involved in the effort to restart state-owned enterprises. U.S. government personnel approve projects for funding and provide overall management oversight while the contractors monitor project execution, business plan development, and verify that items purchased are delivered to the SOEs.

Before the war, about 200 SOEs were in Iraq. These enterprises included cement, chemical, construction, dairy, industrial, and textile operations. According to DOD, these enterprises employed about 200,000 people. This workforce was largely idled as a result of the war and its aftermath. The Congress authorized about $100 million and DoD allocated an additional $3 million of its FY 2008 funds for Task Force efforts to revitalize SOEs. As shown in Table 1, about $67.6 million have been obligated and about $27 million had been disbursed as of November 30, 2008.

2 Information on a Special Department of Defense Program to Foster Economic Recovery in Iraq, SIGIR-08-024, July 29, 2008. 3 The Deputy Under Secretary oversees the Business Transformation Agency, which is accountable for delivery of common processes and systems supporting logistics, acquisition, finance, and personnel activity in DoD.

2

Table 1 – Funding to Revitalize State-owned Enterprises (dollars in millions)

Funding Source Authorized Obligations Disbursements FY07 Iraqi Freedom Fund $50.0 $49.0 $27.0

FY08 Emergency and Extraordinary Expense Fund $ 3.0 $3.0 $0

FY08 Iraqi Freedom Fund $50.0 $15.6 $0

Totals $103.0 $67.6 $27.0

Source: DoD.

As of November 30, 2008, about $35.4 million of the authorized funds have not been obligated. The Task Force evaluated over 70 projects and funded projects in 34 SOEs in FY 2007. These projects were primarily located in Baghdad and in central Iraq and were selected to help reduce unemployment and insurgency in densely populated areas. The majority of the FY 2007 funding has been used to purchase equipment, spare parts, and raw materials as shown in figure 1.

Figure 1 – Use of FY 2007 Funding

Source: SIGIR analysis of DoD data. Appendix B shows the items purchased with FY 2007 funds by SOE. For FY 2008, the task force received requests for about $224 million in assistance from SOEs. The Task Force used eight criteria to evaluate project requests. These criteria included the Multi-National Force Commander’s priorities, impact on employment, sustainability, and market for products. As of November 30, 2008, the Task Force had approved 12 projects for $15.8

3

million and another 18 projects for about $30.1 million were still under review. The remaining $4 million is being held in reserve for new projects or changes to ongoing or projects under review. Once a project is selected for funding, the Task Force enters into a cooperative agreement with the state-owned enterprise. The agreement describes the assistance to be provided, the project time frames, and the procedures for the disbursement of funds. Funds can be disbursed through contracts awarded by the Joint Contracting Command-Iraq/Afghanistan (JCC-I/A)4, or through an electronic fund transfer or cash payment directly to a state-owned enterprise to make its own purchases. The Task Force prefers that JCC-I/A award contracts to maintain better control over the funds. Objectives

SIGIR’s objectives for this report were to assess the following:

the baseline data and performance metrics the Task Force used to estimate the impact of its projects

the adequacy of management controls the Task Force has in place to mitigate risk and ensure funds are used for the intended purposes

the Task Force’s future plans to assist State–owned enterprises

For a discussion of the audit scope and methodology, see Appendix A. For a list of SOEs assisted with FY 2007 funds, see Appendix B. For a list of acronyms used in this report, see Appendix C. For a list of audit team members, see Appendix D. For comments received from the DoD, see Appendix E.

4 The JCC-I/A was created in November, 2004 to manage DoD contracting in Iraq and Afghanistan.

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Lack of Reliable Baseline Data and Performance Measures Make It Difficult to Fully Estimate Impact The Task Force efforts have helped to restart state-owned factories through the purchasing of equipment, spare parts, and raw materials. However, the full measure of its impact is difficult to estimate because baseline data on the number of employees actually working and actual production could not be established at the SOEs that were assisted. Furthermore, SIGIR was unable to validate the methodology used because there was no supporting documentation on how it was developed. SIGIR does not believe it provides a reliable basis for estimating job impact. Additionally, achieving employment impact has taken longer than expected due to the longer than anticipated time required to implement the projects.

Limited Baseline Data from Which to Track Progress Our review of factory assessments completed by the Task Force showed that they did include estimates of the number of employees currently working and the number that could be achieved if the factory was operating at design capacity. In addition, most assessments included information on the factory’s designed production capacity but not current actual production. Some assessments did include estimates of current production which were obtained from the Iraqi management team or estimated by the Task Force site assessment team. For example, the assessment for the State Company for Cotton indicated that the operating capacity of the factory was unclear but estimated that it was between 30 and 50 percent depending on employee attendance and power. Task Force officials acknowledge limitations in baseline data and cited two primary reasons why reliable baseline data could not be established. First, for security reasons the teams that conducted factory assessments had only one hour to tour each of the factories and identify potential projects that could improve operations. Secondly, the assessment teams had to rely on testimonial evidence from the Iraqi management team on the status of production and number of employees working. The Task Force officials has recently developed performance metrics such as impact on employment, production, and sales and plans to establish a baseline for these metrics to better assess the impact of FY 2008 projects. In addition, the Task Force plans to have a public accounting firm validate the actual jobs created at the SOEs.

Methodology for Estimating Job Impact Has Weaknesses Limiting Its Reliability

The Task Force obtained data on employment from six SOEs which it reportedly used in developing a methodology to estimate the impact at the 26 other SOE’s assisted in FY 2007.

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The Task Force visited 12 SOEs and requested they provide data on employment impact. According to Task Force officials, six SOEs provided data indicating that 7,560 jobs would be impacted. This data indicated that 19 to 60 percent of the jobs at these SOEs were impacted. For example, the State Company for Mechanical Engineering estimated that 1,100 of 5,902 (19 percent) of the jobs would be impacted while the Najaf Ready to Wear Company estimated that 1,800 of 3,019 (60 percent) of the jobs would be impacted. The methodology developed by the Task Force used various percentage factors to multiply against the total number of employees in an SOE, to project an employment impact (see table 3). For example, the Task Force estimated 1,199 jobs at State Company for Electrical Industries would be impacted by multiplying a 25 percent impact factor times 4,797(the total number of employees in the company). Table 3 – Percentage Impact Factors Used to Estimate Employment Impact for FY 2007 Projects

Number of Employees Percentage Impact Factor

1,000 or less 35%

1,001 to 3,000 30%

3,001 to 5,000 25%

Greater than 5,001 20%

Source: DoD. As noted in the table, various employer impact percentages (multipliers) were used depending on the number of employees. According to Task Force officials, the various employment impact percentages were developed after evaluating the employment impact data provided by the six SOEs. However, no documentation supports how the percentage impact factors were developed, and a number of anomalies were identified in individual impact projections. In some cases, the Task Force estimates of employment impact seem overstated because they based their estimate on the total number of employees in a company rather than the number of employees at the factories being assisted. For example:

The Task Force estimated that 1,522 (20 percent) of the 7,622 jobs at the State Company

for Dairy Products would be impacted when a milk plant under construction is completed in March 2009. However, during our November 2008 visit to the construction site, the engineer estimated that about 600 people would be employed once the milk plant is completed. The Task Force based its estimate on the total number of employees in the entire company. This company had the fifth highest estimated employment impact.

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The Task Force estimated that 1,231 (25 percent) of the 4,822 jobs at the State Company

for Leather would be impacted. However, during our November 2008 visit to the factory, the Director General stated that the factory had 1,386 employees. Thus, using the Task Force methodology only 416 jobs would be impacted (1,386 X 30 percent). This company had the sixth highest estimated employment impact.

The Task Force estimated that 1,199 (25 percent) of the 4,797 jobs at the State Electrical Company would be impacted. The company has several plants but the Task Force project involves only the air-conditioning plant. The company’s September 2008 business plan indicates that 1,545 employees are at this plant. Thus, using the Task Force methodology only 464 jobs would be impacted (1,545 x 30 percent). This company had the eighth highest estimated employment impacts.

Our work identified other areas that raise questions about the actual employment impact, as shown in the following examples.

The Task Force estimated that its project would impact 1,885 of the 9,424 jobs at the State Company for Textiles-Hilla. However, the November 9, 2006 factory assessment relied on by the Task Force indicates that 3,000 employees were working and they already were at maximum plant capacity, and the Task Force funding was simply used to purchase raw materials. This company had the highest estimated employment impact.

The Najaf Ready to Wear Company reported to the Task Force that 1,800 jobs were impacted. The November 6, 2006 factory assessment relied on by the Task Force indicated that 1,700 people were currently working and 800 more could be employed if more orders were received. The company’s September 2008 business plan indicates the company has 1,710 employees. This company had the second highest estimated employment impact.

A Task Force official stated that the Ministry of Industry and Minerals (MoIM) provided the number of employees at each SOE. This official indicated the data may represent total employees for each SOE versus employees by factory, but stated that it was the best data available at the time. Finally, the Task Force official stated that some of the projects are assisting more than one factory per SOE. We also recognize that increased employment at a given factory could have a secondary impact through creation of jobs in supporting industries such as truckers and distributors. The Task Force’s methodology, as described to us, did not specifically account for this secondary impact, and the data issues we identified make it difficult to rely on the data to estimate real employment impact.

The Task Force estimates that the FY 2008 projects already approved and under consideration will impact about 3,200 jobs, which is significantly less than the FY 2007 projects for the same investment. Task Force officials stated that the majority of the estimated impact is based on SOE project proposals from business plans that they had developed, but which did not exist in 2007. Task Force officials noted that once all FY 2008 projects are approved, they plan to interview management staff at each factory being assisted to verify the number of employees that

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will be impacted. Task Force officials believe the number of jobs impacted will increase based on data collected during their site visits.

Quick Impact on Employment Difficult to Achieve

The Task Force has not impacted employment as quickly as anticipated because projects are taking longer to implement than planned. The Task Force originally planned to implement most of the FY 2007 projects within six months from the date the cooperative agreements were signed. However, only one project was completed within six months and most projects are now estimated to take more than 13 months to implement. According to Task Force officials, the 180-day estimate proved to be unrealistic and that they set this as a goal since MNF-I was encouraging them to complete the projects quickly to help improve the security environment. Our analysis indicates that 20 of the 34 (59 percent) of the FY 2007 projects at SOE’s being assisted are now estimated to take more than one year to implement, as shown in table 4. Table 4 – Estimated Time to Complete FY 2007 Projects and Estimated Employment Impact

Estimated Months to Complete

Number of Projects Percent

Estimated Employment

Impact 6 or less 1 3% 84

7 to 12 13 38% 8,915

13 to 18 19 56% 14,403

More than 18 1 3% 1,027

Total 34 100% 23,429

Source: SIGIR analysis of DoD data.

Projects are taking longer to complete for several reasons. First, it is taking longer than anticipated to implement projects because of the time required for the SOEs to develop their requirements. For contracts awarded by JCC-I/A, our analysis indicates that it takes an average of 180 days (from a range of 30 to 330 days) for JCC-I/A to award a contract once a cooperative agreement has been signed. Task Force officials stated that obtaining a detailed list of requirements from some SOE’s has taken longer than anticipated. For example, the Task Force signed a cooperative agreement Fallujah Cement Company in September 2007 to purchase generators and equipment, but the company did not provide the task force with detailed equipment requirements until June 2008. Secondly, Task Force officials some projects are delayed because of the time required for JCC-I/A to award a contact once it receives the requirements from the Task Force. Thirdly, some projects have been delayed because some SOEs changed how they were going to use the funds after the cooperative agreement was signed. For example, in 2008 the State

8

Company for Northern Fertilizer signed a cooperative agreement for $5 million to purchase generators. However, in February 2008 the company notified the Task Force that it had purchased the generators from another source and now wanted to use the funds to buy various other pieces of equipment. JCC-I/A awarded contracts for $1.7 million in August and September 2008 for the other items; however, the equipment is not scheduled to be delivered until March through July 2009. Furthermore, requirements for the remaining $3.3 million in available funds have yet to be determined. Based on their experience with FY 2007 projects, the Task Force has increased the planned implementation period for FY 2008 projects to one year. Task Force officials recognize that one year is still shorter than the projected implementation period for the majority of the FY 2007 projects. Task Force officials stated they have taken steps to improve communications with the SOEs. First, the kick-off meetings are limited to four SOEs at a time to allow for more one-on-one attention. One official stated that this provides the opportunity to inform the SOEs that the faster they identify their specific requirements the faster their operations will be impacted. In FY 2007, the Task Force had one kick-off meeting with all 34 SOEs. In addition, the Task Force has moved staff to Basrah to manage the projects in southern Iraq to increase interaction between the Task Force and SOEs that are being assisted, and are considering moving some staff to mange projects in northern Iraq.

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Controls over Disbursements Can be Improved SIGIR’s work identified three areas where internal controls can be improved, two related to funding provided directly to SOEs to make purchases, and a third area involving contracts awarded directly by the U.S. for items to be delivered directly to SOEs. In the first instance SIGIR found that while the Task Force verifies that items purchased directly by SOEs are received, it does not obtain copies of invoices to verify the cost of these items. In the second instance, we found two cases where the Task Force provided the cash equivalent of $229,400 in Iraqi dinars to two SOEs, but has not verified how these funds were used. In the third instance, SIGIR found that items purchased on U.S. contracts were often paid for before verifying receipt of the items by the SOEs. SIGIR found that verification of receipt has occurred after the fact, but this practice creates a vulnerability to fraud. The Task Force disburses funds through contracts awarded by JCC-I/A or direct transfers to SOEs. As of November 2008, about $16.7 million or 61 percent of disbursements have been direct transfers to SOEs, as shown in table 5.

Table 5 – Disbursement of Funds (as of November 2008) Method

Amount Disbursed

Percentage

Contracts awarded by JCC-I/A $10,567,353 39%

Direct disbursements to SOEs1 $16,702,140 61%

Total $27,269,493 100% Source: SIGIR analysis of DoD data.

Note: 1 Electronic and cash payments.

The Task Force prefers to award contracts though JCC-I/A to maintain better control over the funds. When JCC-I/A awards a contract, funds are not supposed to be disbursed until the Task Force verifies that items have been delivered to an SOE. However, under direct fund transfer, funds are considered disbursed when the transfer occurs, which is before delivery of material. Task Force officials recognize that direct transfers create a greater vulnerability to fraud and waste because it has less visibility regarding actual purchases. Nevertheless, we noted weaknesses in each of these areas.

Control over Use of Funds Provided Directly to SOEs Can Be Improved Funds provided directly to SOEs are either in the form of an electronic fund transfer or cash payment. The Task Force verifies that items purchased directly by SOEs are received, but does not obtain copies of invoices to verify the cost of these items. Additionally, we identified a

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couple of instances where cash was disbursed directly to SOEs to be used for general operating expenses without follow-up to see how these funds were used. The absence of a verification requirement creates a vulnerability to undetected fraud since about $16.7 million or 60 percent of disbursements as of November 30, 2008 were made through fund transfers made directly to SOEs. The following example illustrates the importance of obtaining copies of invoices to support SOE’s direct purchases. During March and May 2008, the Task Force transferred $635,000 electronically to the Ninewa Furniture factory to purchase raw materials, equipment, and spare parts. In August 2008, the Task Force verified that the State Company for Furniture-Ninewa had purchased and received spare parts valued at $55,565, and that two pieces of equipment costing $245,000 were ordered but had not been delivered. While the Task Force performs visual inspections to verify that the spare parts were delivered, it did not obtain copies of invoices or contracts that showed the dollar value of the spare parts received or the equipment on order. In November 2008, the Task Force returned to the company to verify that the equipment on order during their previous visit had been received. During this visit, the Task Force learned that the Director General had been fired for his failure to follow the company’s procedures for purchasing equipment. Available documentation indicates that the Director General had purchased a generator and forklift without prior approval and solicited only one bid for the various purchases, while company policy requires three bids to be obtained. The Director General was able to purchase the generator and fork lift for $27,000 because the contract for the spare parts was for $23,839 and not $55,565 as previously reported. Finally, the Task Force learned that the company had terminated the contract for the two pieces of equipment that had not been delivered. However, a certain portion of these funds were wasted because the company lost the $23,700 down payment it had made on the original contract. Furthermore, in two cases, involving cash given directly to SOEs, the Task Force provided the equivalent of $229,400 in Iraqi dinars to two SOEs. Between September and November 2007, the Task Force provided the Director General of Tikrit Flour the equivalent of $150,000 in Iraqi dinars and in June provided $27,400 in Iraqi dinars. Likewise, in June 2008, the Task Force gave the Director General of KRG Carpet the equivalent of $52,000 in Iraqi dinars. According to Task Force officials these cash payments were for general operating expenses and represent the only cases where cash was disbursed. However, we found that the Task Force had not verified how these funds were actually used by the SOEs. In commenting on a draft of this report, the Director noted that only one payment was made for general operating expenses and that the other payments were made to procure raw materials and, in the case of the Tikrit Flour factory, for expenses to open the factory. We were unable to verify this new information but included it to fully present the Task Force’s position. We will verify this data when we follow up on our recommendations. Payments Made On U.S. Contracts before Verification of Receipt The internal control procedures for contracts awarded by JCC-I/A call for the Task Force to verify receipt of items before payment is made by JCC-I/A. However, we found this procedure

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is not being followed. Our analysis indicates that about $7.6 million of the $10.6 million, or 72 percent, of disbursements under JCC-I/A awarded contracts through November 30, 2008 was disbursed prior to the Task Force verifying receipt of the items. For example, JCC-I/A disbursed $211,863 in March 2008 for various pieces of equipment purchased for the State Company for Drugs, but the Task Force did not verify receipt of the items until September 2008. This occurred because JCC-I/A processes invoices for payment as they are received and does not have procedures to check with the Task Force if the items have been received. The Director, in responding to our draft report commented that procedures are in place to ensure verification of receipt of goods before funds are disbursed. Nonetheless, our analysis indicated that verification had not taken place.

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Future Assistance to SOEs Expected to be Limited According to the Deputy Under Secretary of Defense for Business Transformation, DoD does not plan to request any more funding for projects to restart SOEs. He stated that no further funding is needed because the Government of Iraq has significantly increased MoIM’s capital budget to rehabilitate SOEs and has begun to enter into joint ventures with foreign investors to operate some SOEs. The Advisor to the Minister of Industry and Minerals noted that when DoD efforts to restart SOE’s began in 2006, MoIM’s capital budget for SOE’s improvement projects was about $10 million, and it was about $30 million in 2007. He noted that the DoD funding allowed MoIM to begin revitalizing some SOEs. However, the Director, in commenting on our draft report, noted that the capital budget increased to $500 million in 2008. Furthermore, the Special Advisor noted that Government of Iraq’s strategy is to invest in SOEs to make them attractive for joint ventures with foreign investors. The Advisor noted that MoIM is responsible for 67 SOEs and believe that between 15 to 25 percent are currently attractive to investors; 35 to 55 percent need some additional GOI funding to make them attractive; and the remainder are not viable for foreign investment. He stated that the Government of Iraq has recently entered into joint ventures with foreign investors for two state-owned cement companies and is in the process of negotiating additional agreements. In addition, the Deputy Under Secretary of Defense for Business Transformation noted that the Government of Iraq has recently signed memorandums of understanding with foreign investors to invest $280 million in a state-owned fertilizer company and $80 million in a state-owned electrical company, and in commenting on our draft report noted that over $900 million in foreign private investment was secured in formerly idled state owned factories in Iraq. The Deputy Under Secretary of Defense believes these joint ventures also demonstrate the impact of the Task Force’s efforts in Iraq. The Task Force has contracts with two consulting firms to provide technical assistance and build the capacity of MoIM and the SOE management which will extend until the end of FY 2009. These contracts include helping MoIM negotiate joint ventures with foreign investors and helping SOEs develop business plans. According to the Deputy Under Secretary of Defense for Business Transformation, if MoIM wants this technical assistance to continue beyond FY 2009, they will have to pay for it.

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Conclusions and Recommendations The Task Force faced a very difficult security environment, particularly as it launched the initial phases of its efforts. Nonetheless, the Task Force’s efforts have served to help restart state-owned factories and provide employment. However, without baseline data it is difficult to accurately estimate the full impact of Task Force efforts to restart state-owned enterprises. In addition, there is some question about the extent of employment impact related to the projects funded in FY 2007. We are encouraged that the Task Force has established performance metrics for projects being implemented with FY 2008 funds, and plans to develop baseline data.

Although controls were in place to ensure the receipt of items before payments were made, they were not always followed. Further, effective controls were not in place for electronic and cash payments, thus creating a vulnerability to fraud and waste.

To ensure that reliable data is available to assess the impact of projects being implemented with FY 2008 funds, SIGIR recommends that the Deputy Under Secretary of Defense for Business Transformation require the Task Force to (1) establish milestones for the timely collection of baseline data associated with the recently created performance metrics.

To improve accountability of U.S. funds and reduce vulnerability to fraud, SIGIR recommends that the Deputy Under Secretary of Defense for Business Transformation require the Task Force to (2) obtain copies of invoices to verify the cost of items purchased directly by SOEs; and (3) adhere to existing internal control procedures and verify receipt of items at SOEs before payment is made under contracts awarded by JCC-I/A.

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Management Comments and Audit Response

The Deputy Under Secretary of Defense for Business Transformation, Director, Task Force to Improve Business and Stability Operations, Iraq (TFBSO) provided comments on a draft of this report. A copy of this letter is in Appendix E. The Director stated that he appreciated the recommendations made in the report and is working to implement them. However, he also noted that he believes the report falls short in acknowledging the environment that existed at the time the program was started, and their conservative approach to establishing an estimate of jobs impacted for use in internal MNF-I reporting, the strong Validation and Verification procedures in place, and the impacts to the stabilization of Iraq the program has made. He further noted that TFSBO’s ability to spend time and money doing detailed “baselining” during the worst period of insurgent activity was very limited. However, nonetheless, they are acquiring the services of a professional accounting firm to audit the entire “value chain” impact of their efforts. Our final report notes that the task faced a very difficult security environment, particularly as it launched the initial phases of its efforts. Nonetheless, the task force’s efforts have served to help restart state-owned factories and provide employment. However, we continue to believe that the program’s full success is difficult to measure without adequate baseline data. We are encouraged that the task force plans to engage an accounting firm to determine the impact of their efforts. The Task Force Director also noted that Task Force efforts have led to foreign and private investment in SOEs it has reopened, and that it is working with the Government of Iraq to increase the budget of the Ministry of Industry and Minerals. Our draft report discussed both of these issues and this report was updated to reflect information provided by DoD. . The Director recognized SIGIR’s concern regarding controls over disbursements over equipment and funds but went on to note various risk mitigation measures they had in place including that Task Force personnel physically verify receipt of equipment and material. Our draft report recognized that the Task Force verifies physical receipt of equipment and material, and we continue to believe that obtaining an invoice is a standard part of an effective management control process. The Director provided additional information on disbursements which we incorporated into this report as appropriate. Finally, DoD noted that a system is in place to ensure that the Task Force and JCC-I/A coordinate before an invoice is paid. Our draft report stated that a system is in place; however, our work shows this process was not always followed.

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Appendix A—Scope and Methodology Under the authority of Public Law 108-106, as amended, which also incorporates the duties and responsibilities of inspectors general under the Inspector General Act of 1978, as amended, SIGIR performed an audit of the performance metrics and internal controls used by the Task Fore to Improve Business and Stability Operations in Iraq to ensure that U.S. funds have been used for their intended purposes. We performed our work in Arlington, Virginia and Baghdad, Iraq. We conducted this performance audit from October 2008 through January 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform an audit to obtain sufficient information, and appropriate evidence to provide a reasonable basis for our results based on our audit objectives. Based on those objectives, we believe that the evidence obtained provides a reasonable basis for our results.

We conducted work at the Task Force locations in Washington, D.C. and Baghdad, Iraq. We also visited the following five state-owned enterprises: the State Company for Dairy Products, the State Company for Heavy Equipment Engineering, the State Company for Leather Industries, the State Company for Rubber Industries and the State Company for Woolen Industries. We selected these companies because they were in the top ten for funding or for estimated employment impact. Security requirements limited the number of state–owned enterprises we could visit, and the time available at each site.

To assess the baseline data and performance metrics used to evaluate the program’s impact, we reviewed data in the Task Force project management system, known as Mercury, and interviewed Task Force officials to identify the baseline data on the estimated employment impact from the Task Force. For FY 2007 projects, we interviewed Task Force officials regarding the methodology they used to estimate employment impact. For FY 2008 projects, we reviewed SOE projects proposals that estimated employment impact. We also obtained information on employment impact from Iraqi officials at the five factories we visited. To analyze the time to implement the FY 2007 projects, we compared the completion dates in the cooperative agreements to the actual or estimated completion dates in the Mercury project management system. To determine why projects were taking longer to implement than planned, we analyzed the time between the signing of cooperative agreements and contract awards as well as time between contract award and the receipt of equipment at the SOE. We also interviewed Task Force officials to obtain their views on why projects were taking longer to implement than planned and the actions they have taken to improve implementation of FY 2008 projects.

To assess the management controls established to guide project execution and mitigate risk, we interviewed Task Force, JCC-I/A, and contractor officials, who developed internal control procedures and reviewed those procedures. In addition, we interviewed a senior official from the firm hired by the Task Force to verify receipt of goods at the SOEs. We tested the internal controls over disbursements through JCC-I/A and those made directly to SOEs through direct fund transfers. For direct fund transfers, we reviewed documentation supporting the transfer and receipt of funds to an SOE’s bank account. In addition, we reviewed all site visit reports that verified the receipt of raw material or equipment purchased directly by an SOE.

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To determine the Task Force future plans to assist state-owned enterprises, we interviewed the Deputy Under Secretary of Defense for Business Transformation regarding DoD plans to assist SOEs beyond FY 2008. We also interviewed the Advisor to the Minister of Industry and Minerals regarding GOI plans and funding for SOEs. Use of Computer-Processed Data

For the purposes of this review, we obtained information from the Task Force’s project management database referred to as Mercury and the JCC-I/A’s Joint Contingency Contracting System. The Task Force provided SIGIR with direct access to the Mercury database. For individual projects, we reviewed information such as overall timeframes, cooperative agreements and modifications to these agreements, site visit reports, and other information related to contact with the SOEs being assisted for each FY 2007 project. Task Force officials stated that they began using this system in August 2008 and that it may not contain all the documentation for FY 2007 projects because they were generally started between August and September 2007. We relied on the database primarily for actual or estimated completion dates and for copies of the site visit reports. We also obtained data on disbursements from JCC-I/A’s Joint Contingency Contracting System. We verified the data with a spreadsheet maintained by JCC-I/A for the Task Force that showed the status of obligations and disbursement by project. Prior Coverage

SIGIR previously reported on the financial resources devoted to the Task Force, and the major areas of economic development assistance, along with examples of completed and planned projects.5

5 Information on a Special Department of Defense Program to Foster Economic Recovery in Iraq, SIGIR-08-024, July 29, 2008.

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Appendix B—State-owned Enterprises Assisted with FY2007 Funds

State-owned enterprise FY 2007 Funding Description of items purchased

Abu Ghraib Dairy $3,425,000 Construction of a milk processing plant Al Faris State Company $220,000 Welding and bending machines Al Furat Company $1,500,000 Generators, fuel tank, welding machines, and spare

parts for heat exchanger Anna Ready to Wear $275,000 Fabric Baiji Fertilizer $6,600,000 Caustic soda flakes, cement, motors, and spare parts Basrah Chemical $250,000 Seals, gaskets, and valves for boilers Diyala Electric $1,550,000 Equipment to improve transformer and power

distribution production lines Fallujah Cement $1,500,000 Generator and spare parts General Systems Company $150,000 Engineering services KRG carpet $52,000 General operating expenses Mosul Ready to Wear $1,825,000 Fabric, embroidery and dying machines, an d spare

parts NASSR $460,000 Forklift, welding machines, plasma cutter, and control

panels for heating system National Bike $128,850 Brake presses for wheelchairs Najaf Ready to Wear $1,500,000 Spreading machines, scanner, bias group equipment,

sewing machines, and final pressing equipment Ninewa Furniture $635,000 Wood to build furniture for trailers State Company for Agricultural Supplies

$400,000 Helicopter engines, rotors and spare parts

State Company for Automotive Industries

$1,500,000 Welding machines, forklifts, semi-trailer axles, torches, and compressors

State Company for Cotton Industries

$2,350,000 Cotton, drawing and bleaching machines, and generators

State Company for Design and Engineering Consultation

$150,000 Engineering services

State Company for Drugs-Nineveh

$1,000,000 Production line equipment and spare parts

State Company for Electrical Industries

$625,000 Parts for air-conditioning assembly

State Company for Electronic Industries

$500,000 Test equipment and spare parts for computer repair

State Company for Furniture-Baghdad

$570,000 Plywood and forklift

State Company for Glass and Ceramic

$935,000 Training and spare parts

State Company for Handmade Carpets

$750,000 Various fabrics, sewing machines and computers

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State Company for Heavy Equipment Engineering

$1,743,610 Oxygen PSA generator, Computers and Auto CAD software, and generators

State Company for Industrial Design and Construction

$150,000 Engineering services

State Company for Leather Industries

$1,000,000 CNC Cutting machines, tanning equipment, and sheep skin machine

State Company for Mechanical Industries

$5,693,742 Tractors, backhoes, tillers, and tools

State Company for Rubber Industries

$2,160,785 Fuel oil burners, control panel, pipe, valves, flanges for water treatment system

State Company for Textiles-Hilla $2,000,000 Various yarns, and sewing equipment State Company for Textiles- Wassit

$1,350,000 Various yarns

State Company for Woollen Industries

$2,000,000 Various fabrics, sewing machines, and forklift

Tikrit Flour $177,800 General operating expenses

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Appendix C—Acronyms Acronym

Description

DoD Department of Defense FY Fiscal Year GOI JCC-I/A MoIM

Government of Iraq Joint Contracting Command-Iraq/Afghanistan Ministry of Industry and Minerals

SIGIR Special Inspector General for Iraq Reconstruction TFBSO Task Force to Improve Business and Stability Operations

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Appendix D—Audit Team Members This report was prepared, and the review conducted, under the direction of David R. Warren, Assistant Inspector General for Audit, Office of the Special Inspector General for Iraq Reconstruction. The staff members who contributed to this report include:

Ken Bowen

Ziad Buhaissi Ben Comfort

Mike Kennedy

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Appendix E – Management Comments

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SIGIR’s Mission Regarding the U.S. reconstruction plans, programs, and operations in Iraq, the Special Inspector General for Iraq Reconstruction provides independent and objective:

oversight and review through comprehensive audits, inspections, and investigationsadvice and recommendations on policies to promote economy, efficiency, and effectivenessdeterrence of malfeasance through the prevention and detection of fraud, waste, and abuseinformation and analysis to the Secretary of State, the Secretary of Defense, the Congress, and the American people through Quarterly Reports

Obtaining Copies of SIGIR Reports and Testimonies

To obtain copies of SIGIR documents at no cost, go to SIGIR’s Web site (www.sigir.mil).

To Report Fraud, Waste, and Abuse in Iraq Relief and Reconstruction Programs

Help prevent fraud, waste, and abuse by reporting suspicious or illegal activities to the SIGIR Hotline:

Web: www.sigir.mil/submit_fraud.htmlPhone: 703-602-4063Toll Free: 866-301-2003

Congressional Affairs Hillel WeinbergAssistant Inspector General for

Congressional AffairsMail: Office of the Special Inspector General

for Iraq Reconstruction400 Army Navy DriveArlington, VA 22202-4704

Phone: 703-604-0368Email: hillel.weinberg@sigir.mil

Public Affairs Kristine BelisleAssistant Inspector General for Public AffairsMail: Office of the Special Inspector General

for Iraq Reconstruction400 Army Navy DriveArlington, VA 22202-4704

Phone: 703-428-1217Fax: 703-428-0818Email: PublicAffairs@sigir.mil